Bulge bracket

Bulge bracket is a phrase associated with finance, in particular the investment banking industry. It has both a common meaning and a more technical meaning. Historically, the two meanings were once more closely linked.

In common phraseology

In common use, the term 'bulge bracket' refers loosely to the group of investment banks considered to be the largest and most profitable in the world, as measured by various league table standings. Since the criteria for this judgment are unclear, there is often debate over which banks form part of the bulge bracket (debate that is unsurprisingly heavily biased in favor of firms that one has professional connections with).

Banks considered part of the Bulge Bracket

Commonly, Goldman Sachs, Morgan Stanley, Merrill Lynch and J. P. Morgan & Co., are considered the current undisputable examples. Bear Stearns, Citigroup, Credit Suisse, Deutsche Bank, Lehman Brothers, and UBS are all also widely considered to be in the U.S. bulge bracket. Ultimately it is a subjective term, sometimes based on Thomson Financial League Tables or other deal and market share rankings.

Credit Suisse, Deutsche Bank and UBS are largely the non-U.S. investment banks that are "bulges."

Technical meaning

The term 'bulge bracket' also refers to the first group of investment banks listed on the "tombstone" (financial industry) notifying the public of a financial transaction or deal. In a public securities offering, within the underwriting syndicate, the bookrunning manager (the bank responsible for maintaining the order book when marketing the offering and therefore in control of allocation of securities to investors) appears above the others in the tombstone and on the cover of the prospectus. The font size of the name of this bank, or banks if there are co-bookrunning managers, is larger and it may "bulge" out.

History

The story of tombstone positions and the term "bulge bracket" is told in the "Tombstones" chapter of The House of Morgan by Ron Chernow.

Tombstone positions were a life-and-death matter for Wall Street firms. Those in higher layers, or brackets, received larger share allotments, while smaller firms struggled their way upwards. Within brackets, firms were listed alphabetically. During the Great Alphabet War of 1976, Halsey, Stuart adopted its parent's name, Bache, just to bootstrap up a few lines in tombstones.

According to Chernow, "[i]n the late 1960s and early 1970s, the top tier - called the bulge bracket - consisted of Morgan Stanley; First Boston; Kuhn, Loeb; and Dillon, Read." Morgan Stanley appeared above the other members of the bulge bracket by demanding and receiving the role of syndicate manager.

However, Morgan Stanley "queasily noted the rise of Salomon Brothers and Goldman Sachs, which were using their trading skills to chip away at the four dominant firms." In 1975, to more reflect economic reality, Morgan Stanley "kicked out the fading Kuhn, Loeb and Dillon, Read from the bulge bracket and brought in Merrill Lynch, Salomon Brothers and Goldman, Sachs." However, Morgan Stanley held onto its policy of appearing first by demanding the role of syndicate manager. Nevertheless, "[b]y the late 1970s, Morgan Stanley's sole-manager policy was a gilded anachronism."

For Morgan Stanley, the doomsday trumpet sounded in 1979. That year, IBM asked the firm to accept Salomon Brothers as co-manager on a $1-billion debt issue needed for a new generation of computers...After much resounding talk, nearly everybody [at Morgan Stanley] voted to defy IBM and demand sole management. Morgan Stanley was shocked when word came back that IBM hadn't budged in its demand: Salomon Brothers would head the issue, as planned. It was a landmark in Wall Street history: the golden chains [of Morgan dominance] were smashed.